The Economic and Political Impacts of the Regional Processing Center on Nauru – Genevieve Neilson

In 2018, Nauru celebrates 50 years as the world’s smallest independent state. To prepare for this milestone, President Baron Waqa seeks to put Nauru on a sustainable development path. However, its economic future is clouded with uncertainty because Nauru’s revenue sources are undiversified and closely tied to Australia’s immigration policy. Australia’s asylum seeker policy has garnered considerable criticism from international human rights groups, but Nauru’s perspective of hosting the Regional Processing Center (RPC) has received less attention. With a population of around 10,000 people and a rentier state economy, Nauru has faced several internal political and economic crises in the last few decades. In the short term, the RPC provides revenue sources for the government, employment opportunities for locals, supports population growth and encourages changes in institutions. While the RPC on Nauru has helped to revive the country economically, it has done so with political and social costs that stem from its rentier economy legacy with Australia and the phosphate industry. This paper examines Australia’s historical relationship with Nauru and the economic, social and political impacts of the RPC on Nauru. Rather than progressing into a new era of independence separated from a reliance on resource extraction and processing, I suggest that the RPC extends Nauru’s rentier economy status, which has consequences for the stability of its political and economic environment.

Nauru’s Rentier Economy and Dependency on Australia

Australia has a longstanding colonial history with Nauru that has evolved into a new client-state relationship. Australia administered Nauru as a United Nations Trust Territory on behalf of New Zealand and Great Britain until Nauru achieved independence in 1968. From 1909 to 1967, phosphate was extracted “for the purposes of the agricultural requirements of the United Kingdom, Australia and New Zealand” until it was handed over to the Nauruan Local Government Council (Scobbie 1993). Katerina Teaiwa contends that the history of phosphate extraction in the Pacific reveals “Australia’s deep, organic… relationship with Pacific Islands, and the imperial structures upon which contemporary Australia-Pacific relations are built” (Teaiwa 2015, p. 375). During its administration, Australia built schools, hospitals, as well as apartment buildings and facilities for non-Nauruans who worked in the phosphate industry. Services such as roads, police force, were constructed using the Nauru Administrative Fund. The British Phosphate Commission paid for technology and infrastructure that directly supported the phosphate industry. Naurans meanwhile did not receive their own benefits, as these services were provided for all residents of the island (Pollock 2014).

Historically, wealth created by the phosphate industry was shared unequally and led to reliance on a rentier economy. A rentier economy is one in which “the larger part of state revenues typically comes from exporting natural resources…National revenues originate from outside sources, rather than from domestic productive sectors” (Luciani 1990, p. 71). In a rentier state, the financial revenues go to a “narrow elite” that controls its distribution, potentially leading to illiberal governance and corruption (Pál 2016). Dependence on one export in a rentier economy can shape social classes, regime type, institutions, and decisionmaking for policymakers (Kirkpatrick 2017, p. 4). While rich phosphate enabled Australia and New Zealand to become agricultural producers, it stripped Nauru of its arable land and sense of autonomy. Reliance on rents can “create an inertia that is hard to overcome…to create and promote new patterns of development” (Kirkpatrick 2017, p. 4). With minimal land and no tourism, a formally independent Nauru was destined to live off rents from dwindling phosphate.

Due to internal and external factors, Nauru failed to use its rentier status in a way that could create a sustainable and viable economy. From 1968, the government of Nauru retained revenues from phosphate extraction and used it to fund the Nauru Phosphate Royalties Trust; however in the 1990s government expenditures and declining exports eventually led to a halt in the industry. To make matters worse, Nauru’s Phosphate Royalties Trust had significant financial investments overseas property markets which went south. At one time one of the wealthiest countries in the world per capita, Nauru was now desperately seeking avenues for government revenue. Between 1999-2002, Nauru attempted to become a center for offshore banking, but a lack of controls led to alleged money laundering. Nauru was placed on an OECD blacklist and was forced to institute tighter banking sector oversight in order for a ban to be lifted (Freedom House 2001). In 2001, the country faced crippling debt and a court case with Japan over unpaid government bonds (Ballantine 2001). By 2003, Australia’s development agency placed Nauru as a priority to avoid it becoming a failed state in the Pacific. Australian Foreign Minister Alex Downer said, “We can’t just abandon Nauru.” From its perspective of colonial oversight, Australia had internal discussions on how to create a clear plan for Nauru to avoid collapse (Forbes 2003).

Offshore Detention: Extension of a Rentier Economy

In 2001, Australia created the ‘Pacific Solution’ to appease the Australian public concerned about the growing wave of asylum seekers arriving by boat. Australia’s policy promoted use of offshore processing centers to disable asylum seekers from entering Australia, thereby discouraging them from fleeing their homeland (Phillips 2012). During the program’s pause between 2008-2012, Nauru attempted to restart phosphate exports. In 2010, in the wake of the global financial crisis and instability in Myanmar and Afghanistan (including an ongoing war in which Australia is involved), Australia experienced an increase in refugee flows. Under the direction of Labor Prime Minister Julia Gillard, offshore processing centers were re-established by 2012 in Nauru and Papua New Guinea (PNG). In 2013, re-elected Prime Minister Rudd and a coalition government launched Operation Sovereign Borders which determined that irregular arrivals intercepted at sea would never be settled in Australia but rather in PNG, Nauru or another third country (Refugee Council 2016). For Nauru, this meant the refugees could be transformed into a commodity central to the country’s livelihood and relationship with Australia. The detention centers became an extension of Australia’s earlier history with extractive industries, where value is placed on foreign land as part of a major economic and political policy.

Australia’s development aid to Nauru has supported its goal influencing politics and development in the South Pacific. In a speech that both announced the 2013 RPC arrangement with Nauru and detailed more than $90 million in previous aid, Prime Minister Rudd linked the RPC directly to Nauru’s economic situation: “Australia is committed to Nauru’s future development” (India Blooms New Service 2013). For Australia, its assistance to Nauru is a drop in the bucket compared to its total Pacific regional official development assistance. Solomon Islands, Fiji and Vanuatu all receive more annual financial assistance, and lack a tangible project as significant as the RPC involving Australia’s government. The peak of Nauru’s aid was in 2002, when ODA was almost 13 percent of Australia’s Pacific island assistance. In comparison, assistance to Solomon Islands reached over 53 percent of its Pacific island ODA between 2005 and 2006 (AusAID 2010). Rather than a strictly aid donor-recipient relationship, Australia relies on Nauru to support its own key domestic policy. And, for a second time, the policy to re-establish the RPC in Nauru came at a pivotal time for a Nauru government facing financial and political instability.

Despite the lack of attention to Nauru, some scholars such as Kirkpatrick (2017) suggest that Nauru has moved to a post-rentier economy. He posits how Nauru will transition to a sustainable economy in the absence of a viable phosphate export industry. This analysis focuses on phosphate processing because it is an obvious commodity and typical scenario of raw material extraction (Kirkpatrick 2017). However, more attention must be given to the centrality of its rented land to process refugees for revenues that are redistributed by a narrow elite. I suggest that Nauru has extended its rentier status with the RPC rather than transitioning to a post-rentier economy. This opens up a new method to analyze Nauru’s economy, political relationships and apply the lessons it learned from its earlier history.

President Waqa has sought to counter some traditional forces of its rentier relationship with Australia but Nauru’s lack of resources has only led to a limited ability to sway policy and take independent positions. Under Nauruan law, the RPC is owned and administered by the Nauruan government. Australia’s role is to fund the RPC and provide capacity development. The government of Nauru assesses asylum claims, and ensures security for the residents (Australia Senate 2015). In addition, Nauru also accepts refugees as settlers. Operations on Nauru cost the Australian government more than $419,425 per person per year and are growing, according to the National Audit Office. According to Australia’s Department of Foreign Affairs and Trade, “The presence of the RPC has generated substantial revenues for Nauru with a high level of employment (revenue is up from $20 million in 2010-11 to $115 million in 2015-16).” Yet, Nauru faces capacity constraints to effectively use those resources to achieve development outcomes and build resilience.

Impacts on Nauru’s Political System

Nauru’s rentier economy has consequences for its governance. Since independence in 1968, Nauru has been a democratic society that consistently holds free and fair elections, including its election of President Waqa in 2013 and 2016 (Packham 2016). For at least a period, wealth in natural resources can provide stability for all types of governments, authoritarian and democratic alike (Kirkpatrick 2017, p. 4). Yet some have challenged the Nauru government’s commitment to democratic principles in light of its rentier economy. Stewart Firth, in his 2016 article in The Journal of Pacific History, outlines multiple examples where the Waqa government has “undermined democracy.” This includes weakening the judiciary, suspension of Members of Parliament, firing high-ranking public servants and curbing freedom of speech and other civil liberties (Firth 2016). For some of these reasons, New Zealand suspended its official development assistance worth US$750,000 in 2015 (Radio NZ 2015). These examples contradict Australia’s desire to support a stable and prosperous neighbor that can effectively support vulnerable refugee populations. I agree with Firth’s consideration that Australia’s need for Nauru to host its RPC has outweighed the need to condemn or seek to restrain the Nauru government.

Several political crises in Nauru stemming from its rentier economy are complicated by intense personal rivalries. Nauru’s lack of a strong party system means that candidates often run as independents and do not follow a party ideology. Changes in allegiances within government is common. Thus, for operations funded and supported by international actors, the less change in leadership, the better (ADB 2015). Corruption is a critical issue for Nauru (Pollock 2014). In an illustration of Nauru’s political frustrations in 2014, a journalist for The Age wrote that “Politicians in Nauru are elected in the hope that they will resist abusing the privilege of office, as many have before them” (Metcalfe 2014). Allegations have surfaced that President Waqa and Justice Minister David Adeang accepted bribes from an Australian phosphate company in 2009 and 2010. During the investigation in 2013, the police commissioner was suspiciously dismissed (Freedom House 2016). Additionally, Minister Adeang’s wife burned to death and did not allow a formal investigation (Fox 2015). These examples of crises and corruption can be linked to Nauru’s rentier status and create a negative climate for its ability to process and settle refugees.

Nauru has also seen restrictions on the freedom of expression and information during the existence of the RPC. In 2015 allegedly in response to public criticism, the government removed the former manager of internet service provider Digicel and requested that they block all access to Facebook and several other sites. President Waqa maintained that the ban was first to prevent access to pornography, and later to protect Nauruans from bullying (Firth 2016; Farrell 2015). Legal changes were also made to criminalize “‘political hatred’ or any statement deemed likely to threaten public order punishable by up to seven years’ imprisonment” (Firth 2016). Australia has taken advantage of Nauru’s remoteness and imposed strict rules on information gathering and release. Most foreign journalists are barred from entry, and the price of a media visa has climbed to $8,000 per application; yet there is no guarantee that the government will allow the request (Doherty 2016). Workers must sign nondisclosure contracts and whistleblowers can be prosecuted (Cohen 2016). The lack of communication has resulted in restricted access to the RPC and controlled information flows.

Major domestic legal changes required for Nauru to prepare for the RPC have centered on security and refugees. Nauru passed two sets of legislation, the Refugees Convention Act 2012 and the Asylum Seekers (Regional Processing Centre) Act 2012. These laws enabled the Nauru government to process refugees for Australia in exchange for financial support. An interim Joint Advisory Committee was established, co-chaired by officials from both governments to provide oversight (Hamburger 2013, p. 3). As part of the Pacific Police Development Program, Australia’s Attorney-General’s Department has worked with the Department of Justice and Border Control in Nauru to replace the Nauru Criminal Code of 1899 with the Crimes Act 2016, and introduce mental health legislation (DFAT 2016; Nauru Government 2016).

These new laws establish the conditions for refugees to be used as a commodity to replace phosphate and help perpetuate a rentier relationship between Australia and Nauru. Pollock (2014) claims that during phosphate mining, “Nauruan autonomy was overridden by external commercial exploitation. The economics of extracting phosphate dominated while humanitarian issues arising from imposed commercial activity were sublimated.” Because of financial, socioeconomic and political problems, Nauru has become a critical pillar of Australia’s development and security policy for the Pacific.

Impacts on Nauru’s Economy

In addition to domestic political changes, the RPC has prompted Nauru to integrate into international organizations and develop more long-term financial planning. Because of its small size, remoteness, and lack of human resources, Nauru is often neglected in international financial statistics, and has only recently become a member of international financial institutions. Statistics vary regarding the island’s GDP growth and per capita income, but it is clear that Nauru is at relatively full employment and the RPC has supported annual economic growth. In April 2016, Nauru became a member of the World Bank and International Monetary Fund, the organizations’ smallest member by land mass (World Bank 2016). Joining the IMF and World Bank will enable Nauru to have access to more capital and technical expertise and improve its prospects of attaining funding from climate funding mechanisms like the Green Climate Fund. At the same time, these institutions place constraints on Nauru’s policymaking.

The Nauru economy continues to expand, but sources of growth are limited and it is heavily reliant on foreign assistance. The RPC and its related revenue streams dominate, followed by phosphate exports and fishing licenses. As a percentage of GDP, Nauru receives more financial aid than any other Pacific island country (ADB 2014). In 2015-16, Australia provided $25.2 million in Official Development Assistance to Nauru, roughly 20 percent of the Nauru government’s budget. It is no surprise then that Australia is Nauru’s major development partner, along with Taiwan and Japan (DFAT 2015).

Australia’s role in transforming Nauru’s economy to support the RPC through financial assistance, payment for the RPC and technical support is evident. For example, in 2014, visa charges were the largest source of government revenue at $18 million, half of which came from asylum seeker visas paid by Australia (Flitton 2014). Australia maintains a breadth of social, security and economic programs as part of its development agency, but these have implications for Nauru’s ability to host the RPC. The Australian Federal Police run the Nauru Police Force Police Capacity Program which focuses on creating and maintaining “effective governance systems, training and the provision of critical policing resources” (DFAT 2016). Yet, the ADB has been critical of Nauru’s development progress. Education outcomes are improving but still poor. Nauru lacks sufficient residents for key public sector management roles, relying on external technical expertise. According to the ADB, “levels of noncommunicable diseases (i.e., diabetes and cancer) are among the highest in the world” (ADB 2014). Australia’s development programs and direct assistance support areas that reinforce the viability of the RPC like security and infrastructure, but less has been achieved in education and health.

If or when the RPC closes, the Nauru government is shoring up options for long-term financial sustainability. Australia helped Nauru to institute its first income tax in 2016, important for Nauru’s long-term self-sufficiency. In the last 2 years, the government created the Nauru Intergenerational Trust Fund for the people of Nauru (NTF), also with Australia’s support. Sovereign wealth funds help a country to avoid shocks to the economy driven by natural disasters, economic sources, or other uncertainties. According to the ADB, “the purpose of the NTF is to build-up a sufficient principal value that can provide a future stream of public revenue to support investments in education, health, environment and public infrastructure” (ADB 2016). The build-up phase is ongoing and started with Nauru’s $20 million deposit in January 2017.

Both Australia and the international community are concerned about the extent that Nauru relies upon the RPC for its revenues. The Asian Development Bank has warned that “If the RPC is closed, or significantly scaled down, the government could undergo a painful and potentially destabilizing fiscal adjustment. Without access to additional external financing, government spending would have to be severely curtailed” (Rajah 2016, p. 12). Nauru’s GDP has grown from $20,443,291 in 2007 to $100,457,157 in 2015. It peaked in 2014 at $117,023,941. In addition, GDP per capita has gone from slightly over $2,000 in 2007 to close to $10,000 in 2015 (World Bank). While the Nauru government appears to be planning for its future, with or without an RPC, deeper economic analysis is needed to assess long-term implications for its rentier status as it relates to Australia’s asylum seeker policy.

Future of the RPC

The future status of the RPC in Nauru is unclear, as Australia continues to refine its asylum seeker policy. In addition, the existing contractor has stated it will not renew its contract or even rebid in October 2017 (Blakkery 2017). As of March 31, 2017, there were 373 people in the Nauru RPC (Department of Border Protection & Immigration 2017). Current Australian policy precludes anyone who has attempted to travel to Australia illegally from every being allowed to settle in or visit Australia. Having an agreement with Nauru for settlement is handy to appease Australia’s domestic public because it allows the government to still ‘process’ refugees and provide a place, albeit outside of Australia, for them to live. Past practice shows that this policy could change with leadership.

The United Nations, Amnesty International and others have called for the closure of Australia’s Offshore Processing Centers. Primary concerns for critics have been the lengthy time that asylum seekers spend on Nauru to wait for processing and lack of independent security and healthcare provisions (Phillips 2012). In 2013, a major riot broke out which cost $60 million and destroyed most of the RPC buildings (ABC 2013). An official review stated it was caused by the uncertainty that migrants face about their futures and lack of information about their processing status (Hamburger 2013). Additionally, reports by the United Nations High Commission on Refugees show that the detention center on Nauru led to worsened mental health for refugees (UN News Centre 2016). This is problematic not only for the refugees but for those that place the individuals back into society (McKenzie-Murray 2016).

Refugees who settle in Nauru and asylum seekers waiting for processing can provide new economic opportunities for the local community. Currently, the government promotes and participates in events that promote local businesses like restaurants started by refugees. Refugees can provide employment, bring new cultures and a sense of stability. However to effectively be processed and settled into the community they should have sufficient access to resources to cope with their new environment and the situation they have fled.

Conclusion

Nauru remains a rentier economy even though it has replaced resource extraction with the processing and holding of Australia’s unwanted refugees as a primary source of income. Nauru is reliant on its relationship with Australia for RPC funding and aid in order to maintain much needed civil programs and benefits from the contributions of settled refugees. Its continued rentier status also entails problems for its economic future and the status of the country’s democracy. The contract to manage the RPC expires in October, and it is unclear who will step forward to take over the role, leaving the future of the center and Nauru uncertain. Further, the resources including money and infrastructure provided by the RPC are controlled by a small group in Nauru and benefits may not be felt by the whole population. Relatedly, the relationship provides opportunities for corruption in Nauru’s political system. There are ongoing concerns regarding Nauru’s commitment to democratic principles, transparency and press freedom. The development of a rentier economy may hinder democratic processes and promote authoritarian rule.

The RPC places pressures on the small island state to balance its commitments to Australia, international human rights and its public. Nauru shares these concerns with other small states with rentier economies, not least PNG, which also hosts an RPC for Australia. The RPC in Nauru has been established to manage populations fleeing wars, persecution, and impoverishment. We may see an increase of these types of offshore processing centers to manage precarious populations uprooted by man made and environmental disasters. Nauru is an important case study in how these facilities affect local populations.

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Genevieve Neilson is a 2016 Pacific Security Scholar at the Islands Society. She recently completed her M.A. in International Affairs from The Elliott School of International Affairs at The George Washington University. She also holds a Graduate Certificate from the Bush School of Government and Public Service at Texas A&M University and a B.A. (Honors) in International Relations and Political Science from Victoria University of Wellington, New Zealand. Her research interests include foreign policy and trade in the Asia-Pacific region, public diplomacy, and the Chinese language.

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